Gold bullion – a belated Christmas gift

I am spending a few days of the Christmas break at a village alongside the coastline of the Cape Town Peninsula. It is quaint, picturesque and simply an ideal location for enjoying quality time with the family. The only drawback is that it does become quite windy on occasion – at best not a highly predictable event. This reminds me of the erratic behavior of gold bullion – you just never know with what action the yellow metal is going to surprise you next, making it infamously difficult to predict short-term movements.

And true to form, just as traders were bargaining on a quiet Christmas period, gold again startled with a $15 jump, taking the price well clear of the $800-level. (The rally commenced more than a day prior to the assassination of former Pakistani Prime Minister Benazir Bhutto.) Interestingly, gold has never in its history recorded a month-end price above $800 and only closed above this level on two days during its 1980 surge, namely: $830 on January 18, 1980, and $850 on January 21, 1980. That, however, represented a blow-off with the price plunging to $737.50 a day later and falling further to $659 by the end of January.

It would seem that gold bulls may very well have reason to toast bullion next week, saying goodbye to 2007 having achieved the $800 month-end milestone. There is, however, quite an important difference between 1980 and the present situation. In 1980 gold was in a parabolic rise, whereas since the low of $250 in 2001 gold has been rising methodically, mapping out consistently higher lows as shown below.

The upside breakout from the pennant consolidation pattern is a bullish technical development and looks well supported by the rising momentum (top section of graph) and MACD (bottom section of graph) indicators.

The gold price has not only strengthened in US dollar terms, but has in fact been appreciating in most currencies – an indication of increased investment demand. The following graph and table (not yet reflecting the post-Christmas rally) clearly illustrate this phenomenon.

Source: Plexus Asset Management (based on data from I-Net)

GOLD PRICE MOVEMENTS IN VARIOUS CURRENCIES

Gold price in various currencies

2005

2006

2007 (YTD: Dec 24, 2007)

Gold in US dollar

17.9%

23.1%

27.5%

Gold in euro

34.9%

10.5%

16.9%

Gold in British pound

31.3%

8.3%

26.4%

Gold in Swiss franc

35.9%

14.1%

21.1%

Gold in yen

35.5%

24.4%

22.5%

Gold in Aus Dollar

24.9%

13.9%

16.2%

Gold in Can Dollar

14.0%

23.5%

7.8%

Gold in rand

31.9%

37.1%

27.3%

Gold in renminbi

15.0%

19.1%

20.1%

Gold in rupee

22.7%

20.8%

13.7%

Gold in dinar

17.9%

23.2%

21.1%

Source: Plexus Asset Management (based on data from I-Net)

The pressing question is how sustainable bullion’s uptrend is. Although the technical picture indicates a primary bull market, the fundamental situation offers both bullish and bearish arguments.

The arguments in favor of a rising gold price have been well documented and include: the possibility of ongoing pressure on the US dollar, increasing global inflationary expectations, a surging oil price, minimal new mine production, and the fact that central bank sales are capped through the Central Bank Gold Agreement (CBGA II).

The bears, on the other hand, point to: record long speculator positions that have in the past been strongly correlated with gold price corrections, potentially lower fabrication demand from India (as a result of the higher price), and a slowdown in producer de-hedging as the global hedge book diminishes. Additionally, a seasonally weak period is approaching from February to April as illustrated by the graph below.

I have over the past few months often conveyed my bullish stance on gold bullion. Examples of these articles include: “Gold: forwards and upwards” (September 14, 2007) and “Smart money bets on surging gold price” (September 4, 2007). I see no reason to change this position, from both an absolute and safe-haven point of view. I would, however, caution that one should not chase a surging gold price in an attempt to stock up on the various gold-related instruments. Rather bide your time and wait for the short-term corrections that occur regularly, perhaps coinciding with the advent of seasonal weakness in a few weeks’ time.

The final word goes to George Bernard Shaw who said: “The most important thing about money is to maintain its stability… You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

4 comments to Gold bullion – a belated Christmas gift

Do you think the credit bubble and all the defaulting home mortgages combined with central bank interest rate cuts will be deflationary, and hence bad for gold, or inflationary and therefore bullish for gold?

If we do see a recession and central banks worldwide cut rates, I feel like that’s bullish for gold. But all this bad debt on banks books is deflationary.

I always find it disconcerting that a seemingingly meaningful comparison is often attempted between the 1980s gold price and its currrent value. While they are numerically comparable there is almost a factor of three difference in purchasing power due to the never ending effect of inflation. Gold’s price today would have to be about $2000 to be comparable in purchasing power

I have a new post on probably one of the most important Economic reports coming up a soon:The Unemployment Rate(UR).

I have shown that on a yr/yr basis when the UR surpasses .2%, an accelerated destructive move takes place. Since WW-II, only in 1948 has the % change y/y been higher than the projected 4.8%(or .3% y/y change).
Typically this happens three months into a recession!

[…] first ever month-end close above $800 on Monday, December 31. As mentioned in my blog post “Gold bullion – a belated Christmas gift” (December 27, 2007), gold had only closed above this level on two days during its 1980 […]